Fitch Places Columbia Pipeline on Rating Watch Positive

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has placed the ratings for Columbia Pipeline Group, Inc. (CPGX) on Rating Watch Positive. This follows yesterday's announcement that CPGX has agreed to be acquired by TransCanada Corporation (TRP; not rated).

Fitch rates CPGX's Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. CPGX's Short-term IDR and commercial paper rating are 'F3'.

CPGX is being acquired for approximately $13 billion. Each share of CPGX will be acquired for $25.50 a share. To finance this, TRP has secured a $10.3 billion bridge term loan. This is expected to be refinanced in part with proceeds from an offering of subscription receipts and asset sales. CPGX's debt of $2.8 billion is to be assumed by TRP.

The transaction is subject to CPGX shareholder approval, government and regulatory approvals, as well as customary closing conditions. Closing is expected in the second half of 2016.

KEY RATINGS DRIVERS

TRP intends to assume CPGX's debt. Consequently, Fitch has placed CPGX on Rating Watch Positive since TRP's credit quality is stronger than CPGX's. While Fitch does not rate TRP, it acknowledges that TRP is significantly larger in size and scope with stable cash flows. In addition, TRP has well diversified assets and geographic diversity.

Fitch views the acquisition as favorable for TRP. CPGX's assets will further increase TRP's diversity and TRP anticipates an annual benefit of approximately $250 million a year from cost saving and financing. Importantly, CPGX allows TRP to participate in the Marcellus/Utica shale plays and provides a significant amount of organic growth activity throughout CPGX's existing platform. CPGX already has significant pipeline infrastructure in the Marcellus and Utica regions and plans to expand its position with $7.3 billion in pipeline projects.

The acquisition also provides TRP with increased stability of its cash flows. On a pro forma basis, TRP would have an increase its 2015 EBITDA from regulated and contracted gas pipelines to 63% from 57%. Total EBITDA from regulated and long-term contracted assets increased to 92% from 90% also on a pro forma basis. The planned sale of its merchant power business will further increase the percentage of stable cash flows from regulated and contracted assets.

In addition, CPGX owns 46.5% of its publicly traded MLP, Columbia Pipeline Partners LP (CPPL) through limited partnership units and the general partnership interest. This ownership will transfer to TRP which already owns 27.3% of its MLP, TC Pipelines, LP (TCP) through limited partnership units and the general partnership interest. TCP owns interests in U.S. pipelines.

While TRP has plans to finance the CPGX acquisition with the bridge loan on a temporary basis, it has longer term plans for repayment of the bridge facility. TRP plans to sell assets and raise equity. Assets to be disposed include its merchant power assets in the northeast and its minority interest in its Mexican natural gas pipeline business. TRP has also announced it has raised C$4.2 billion (US$3.2 billion) in gross proceeds from the sale of 92 million subscription receipts (which pay dividends and convert into common stock at the time of the closing, but can be refunded under certain conditions if the deal does not close). There is an underwriter option for another 4.6 million subscription receipts, which would raise an additional C$210 million (~US$160 million).

Ratings concerns for CPGX include execution and integration risk.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for the issuer include:

--TRP closes on the acquisition of CPGX during 2H16 as planned;

--CPGX's debt is assumed by TRP.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--Fitch expects to upgrade CPGX upon the closing of the merger.

Negative: Future developments that may, individually or collectively, lead to a negative rating action include:

--Negative rating action is not anticipated but could occur if the transaction does not occur as anticipated.

LIQUIDITY

Fitch views current CPGX's liquidity as sufficient. CPGX's has a $1.5 billion revolver which extends through 2020. This revolver backstops CPGX's $1 billion commercial paper program. As of Dec. 31, 2015, there were no borrowings on the $1.5 billion bank facility and $18 million of letters of credit outstanding. No commercial paper borrowings were outstanding as of yearend.

The bank agreement prohibits maximum leverage from exceeding 5.5x between 1Q'16 and 4Q'17. Thereafter, it cannot exceed 5.0x. With permitted acquisitions, leverage cannot exceed 5.5x for two consecutive quarters. Fitch expects CPGX to remain complaint with its covenants.

FULL LIST OF RATINGS

Columbia Pipeline Group, Inc.

--Long-term IDR 'BBB-';

--Senior unsecured rating 'BBB-';

--Short-term IDR and commercial paper 'F3'.

The ratings are on Rating Watch Positive.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1001169

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160318005830/en/

Fitch Ratings
Primary Analyst
Kathleen Connelly
Director
+1-212-908-0290
33 Whitehall Street
Fitch Ratings, Inc.
New York, NY 10004
or
Secondary Analyst
Peter Molica
Senior Director
+1-212-908-0288
or
Committee Chairperson
Shalini Mahajan
Managing Director
+1-212-908-0351
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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